Estate Planning Implications of American Taxpayer Relief Act of 2012

by Wendel, Rosen, Black & Dean LLP

The American Taxpayer Relief Act (the Act), which was passed by Congress on January 1, 2013 and signed into law by President Obama on January 2, has finally provided some permanence to the transfer tax laws.

Estate and Gift Tax Exemptions

The exemptions for the estate tax, gift tax and generation skipping transfer tax (GSTT) are now all $5 Million, indexed for inflation, which will be $5.25 Million for gifts made in 2013 and for the estates of decedents dying in 2013. 

Since the gift and estate taxes are unified, any amount of the exemption used during a donor's lifetime reduces the amount available for use at the death of the donor.  However, there remain advantages to making gifts during the lifetime of  a donor, such as getting appreciation out of a donor's taxable estate, the tax exclusive nature of the gift tax, and the availability of discounts for gifts.

Tax Rate

Gifts and transfers at death in excess of the exemption are taxed at 40%.


The Act made "portability" of a deceased spouse's unused estate tax exemption amount permanent.  Thus, if a proper portability election is made at the death of the deceased spouse, the surviving spouse may use the deceased spouse's unused estate tax exemption for gift tax purposes and the surviving spouse's personal representative may use it for estate tax purposes.  However, relying on portability will not produce the most tax advantageous result in many cases, and in some circumstances, the opportunity to use the deceased spouse's exemption may be lost.  In addition, portability is not available for a deceased spouse's unused GSTT exemption.

Contributions to Charity

The Act reinstates the exclusion from gross income for qualified charitable contributions by taxpayers over age 70 ½ of up to $100,000 distributed from an IRA through December 31, 2013.  A taxpayer can elect to have a qualified charitable distribution made in January 2013 as if it were made on December 31, 2012.  Another provision allows a distribution from an IRA to a taxpayer in December 2012 to be treated as a qualified charitable distribution if it is transferred in cash to a qualified charitable organization before February 1, 2013.

Annual Exclusion / Inflation Adjustment

For 2013, the gift tax annual exclusion increases from $13,000 to $14,000 per donee and from $139,000 to $143,000 for gifts made to a non-citizen spouse.  In addition, the threshold at which gifts receivable from foreign partnerships and corporations become reportable to the IRS increases from $13,258 to $15,102, while the value of gifts from foreign individuals and estates that are reportable to the IRS remains at $100,000.

Additional Proposals Not Acted On

The Act did not address the following proposals requiring:

  1. A 10-year minimum term for Grantor Retained Annuity Trusts (GRATS) and eliminating zeroed-out GRATS.
  2. Eliminating valuation discounts for interests in family owned entities.
  3. Limiting the term of GSTT trusts to 90 years.
  4. Requiring that a Defective Grantor Trust be a non-grantor trust if a completed gift is made to that trust.

These estate planning techniques continue to be attractive due to the extremely low current interest rates.

Existing Estate Plans Should be Reviewed

Many estate plans for married couples include a Bypass Trust to shelter the deceased spouse's assets from estate tax when the surviving spouse dies.  Because of the increased exemptions, this may not be the best estate plan, so you should contact your attorney to review your estate plan to discuss whether requiring a Bypass Trust is the best plan for you.  For clients whose estates are expected to exceed $5 Million for a single person or $10 Million for a couple, estate planning techniques that serve to reduce the client's taxable estate continue to be viable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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